Levine on Wall Street: Crowded Trades

A basic rule of investing is that anomalies work for a while but then become crowded. Everyone's doing activist investing now -- "almost 20 percent of the S&P 500 companies have already had some type of activist involvement" (!) -- so it's no longer cool. "There's only so many companies that are undervalued and a lot of people are looking at the same screen and the same performance criteria," says a lawyer. On the other hand I kind of do not understand what the problem is? Like, if your goal is to get shareholders to vote for your plan to enhance shareholder returns, the fact that five other shareholders have the same goal would seem to be to your advantage?

They were supposed to square off today, though it's been postponed. Einhorn is trying to get Seeking Alpha to disclose the name of an anonymous writer who leaked Einhorn's position in Micron Technology before Einhorn made it public himself. "Leaks to the media are a well-worn tradition on Wall Street," says DealBook, which should know, but leaks to Seeking Alpha cause a bit more angst and lawsuits. The hearing is now scheduled for April 1, so in the meantime, here's what we'll do. You all will leave anonymous tips about hedge funds' undisclosed positions in the comments to this post, and we will see who sues.

This is like Round One Billion, and the background is a little hard to explain, but basically Phil Falcone is mad that Charlie Ergen bought a lot of the senior debt of LightSquared, Falcone's bankrupt wireless company. Ergen maybe wasn't allowed to do that, so Falcone is suing to have him forfeit all of that debt and his voting rights in the bankruptcy. On one level I don't envy the judge who has to sort this out, but on another level I totally envy her; this case is nuts. Also: "“It’s crystal clear that LightSquared has an interference problem," says Ergen's lawyer. "That interference problem is Phil Falcone." Buuuuuuurn.

They won us the Alibaba IPO from Hong Kong, which refused to allow Alibaba to list with a dual-class share structure. I have no problem with this; I think companies should be allow to ask for capital on whatever terms they want, and let the market decide if they should get it. If you are planning an activist campaign in Alibaba, though, maybe stop planning that. In other news Alibaba "isn't planning to give any of the banks that are leading its initial public offering a substantially bigger role than the others," and there are five of them, so that's going to be really well coordinated.

If someone sends you an e-mail telling you to buy a penny stock, just don't do it. That doesn't sound so hard, does it? And yet it apparently is, because a guy in the business of sending those e-mails to tout stocks "boosted the combined value of the stocks by as much as $3 billion" and drove a Bugatti Veyron, which I am reliably informed is a very fancy car. Apparently he did not drive it to wherever he is currently hiding from the law.

Apparently 95 percent of ATMs run on Windows XP, and Microsoft is going to stop issuing security updates for XP on April 8, meaning that after that date ATMs will be much easier to hack. Apparently there is an efficient market in ATM hacking:

Jason Fossen, a trainer for SANS Institute and an expert on Microsoft security, says the price of an exploitable vulnerability generally goes from $35,000 to $160,000 for someone trying to exploit a bank's ATMs, depending on whether it's a newly discovered vulnerability and how well it works, among other factors.

"Now, imagine you have recently discovered a new vulnerability in Windows XP," Fossen says. "If you hold off selling the vulnerability until after April 8, when Microsoft will stop releasing any new XP security patches, then that vulnerability should be useful longer (theoretically, forever) and the price should go up."

"I wouldn't be surprised to see the price of some types of XP vulnerabilities double," Fossen says. "And as the price of XP vulnerabilities goes up, this motivates hackers to work harder to find new ones."

Okay! I don't know, this market for ATM vulnerabilities worries me more than the upgrade thing (which might be fine?).

David Zaring writes about corporate internal investigations by outside law firms:

In my view, one of the biggest changes in law firm practice over the past 25 years has been the growth of this sort of work at the largest of firms, which used to stay the heck away from criminal practice. That in turn has been facilitated by the emergence of the internal investigation as something that regulators expect to see done, which means that the new work is actually profitable (those investigations involve a lot of billing, defending a criminal case generally does not). And that in turn has made the revolving door revolve more quickly; it used to involve high-ranking political appointees only, now almost any long-serving, mid-level-at-least lawyer in an enforcement agency can prove useful for a law firm.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

Matt Levine is a Bloomberg View columnist writing about Wall Street and the financial world. He is a former investment banker, mergers and acquisitions lawyer, and high school Latin teacher.
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